A leading regulator of UK banks said that 'free banking' is a myth and warned that the banking model could change – but is it worth paying for a current account?
Banking chief Andrew Bailey has blamed so-called 'free banking' for a series of mis-selling scandals over the years. The argument is that banks can only offer free current accounts by charging excessive fees when you use an overdraft or by flogging products like payment protection insurance.
If the model changes and we all start paying for our current accounts, what can you expect and are the accounts any good?
What are packaged accounts?
Most people have a 'free' current account, though you may pay an arm and a leg for using your overdraft. However, around a fifth of UK adults have a 'packaged account', which bundles in extras such as travel insurance or a fee-free overdraft in exchange for a monthly fee. Car breakdown cover and mobile phone insurance are also typical features.
Deals will vary between accounts and between banks and you need to be sure you will make use of the bolt-on products to make paying for the account worthwhile.
Banks are keen to shift customers onto the fee-based structure. According to financial research company Defaqto, the number of packaged accounts available has more than doubled over five years.
What's the problem with these accounts?
Current accounts were the third most complained about financial product according to the Financial Ombudsman's annual review, with PPI and credit cards topping the table. In some of the cases relating to packaged accounts, customers had been 'upgraded' to one without their consent. The FSA is currently reviewing the market since many customers sold packaged accounts wouldn't have been eligible to claim on the travel insurance included in the deal.
Banks often claim that the savings to be made on these types of accounts can amount to hundreds of pounds, but sometimes the added extras are either unnecessary or could be bought cheaper elsewhere.
Do the maths
When you weigh up the benefits with the costs and compare deals, you might find the figures don't stack up. For example, the Ultimate Reward Current Account from Halifax might fail to live up to its title for many customers. At £10 a month, the main benefits on this account are the worldwide multi-trip family travel insurance and the AA breakdown cover.
However, comparing deals with our travel insurance comparison tool shows you could get a similar insurance policy priced from £39.52 and AA breakdown cover for £75. This adds up to nearly £115 – £5 less than the annual cost of the current account. It's also going to be less useful for individuals or couples, whose insurance could be cheaper still, compared to families.
Other 'benefits' include mobile phone insurance and home emergency cover, but you might already have both as part of your home insurance policy. Card protection is another feature, but it's unnecessary as banks are obliged to refund card fraud anyway.
What's more, if you fail to pay in at least £1,000 a month into this account, the fee rises to £15 a month – or £180 for the year. You do get a £300 fee-free overdraft, but that's only useful if you regularly dip into one.
Are there any good deals?
Some banks have become noticeably more creative in what they include in their fee-based accounts.
For example, the Santander 123 current account pays 3% cashback on phone, internet and TV packages, 2% on gas and electricity bills and 1% on water and council tax bills. There is a £2 monthly fee and you need to pay in at least £500 a month into the account. Balances of £1,000 and over also receive interest.
NatWest and RBS offer film and music deals through their Select Silver accounts. For £8 a month you can rent three DVDs per month from LOVEFiLM and receive two hours of online viewing – alone this is worth £5.99. You can also download five music tracks each month from hmvdigital and annual European travel insurance, including winter sports, is thrown in on top.
The Halifax Reward Current Account also simply pays £5 every month, so long as you pay in £1,000 each month. You can find out more about this account in Earn £60 a year from an empty current account!
Value is in the eye of the account holder
A current account is only ever good or bad depending on what you want out of it. You might value travel insurance and motor breakdown cover over film and music, or vice versa. Insurance add-ons can also prove handy if you're time-poor and can't spare the minutes to compare standalone insurance deals. However, you should always take the time to check the terms and conditions are suitable.
Customer service is another consideration, as not all banks are rated equal – read Britain's best bank account for more on the best (and worst) providers.
Beware the small print
Packaged accounts: is your current account worth paying for?
It is reasonable to assume that if you take out a mobile phone contract at £30 a month for 24 months that's exactly what you'll pay unless you exceed the tariff. Yet mobile phone providers have come under fire for a snag buried in the small print – a clause to allow mid-contract price rises.
Prices are rising by a median of 81p a month and 70% of consumers are completely unaware off this sneaky move, according to Tesco Mobile, so be sure to check any new contracts before you sign the dotted line.
Financial service providers always refer to 'typical APR' in advertising to attract customers with favourable rates of interest.
Yet the typical APR on loans and credit cards is only available for those applicants who have a squeaky clean credit record, everyone else could end up with a much higher rate. For example, under EU rules, credit card providers only have to provide the typical APR advertised to 51% of applicants.
So always consider this when applying for accounts and products, and if approved – look out the actual APR that you will be charged.
The highest paying savings accounts on the market tend to come with a string of strict terms, which if you fall foul of, result in a drop in interest. Common requirements include paying in a set sum each month and not making withdrawals during a set period.
Make sure to fully understand these terms before opening a savings account and if you choose an account with a six or 12 month bonus, remember that this will plummet when the bonus period ends.
Cashback credit cards that pay you a small percentage each time you spend on the card are full of loopholes in the small print. All have a maximum spend, but many have a minimum spend too.
For example, the Sainsbury's Cashback Low Rate card advertises that it offers users 5% cashback for the first three months. However the 5% cashback is capped at £50 a month. A further 5% cashback is subject to you spending £500 a month on the card (£250 of that at Sainsbury's).
Attempt to repay your mortgage early and you may be greeted with a hefty fee in the form of an early repayment charge. These penalties vary from lender to lender and even deal to deal, but are typically be around 10% of the outstanding balance.
Details of any early repayment charges should be clearly outlined in your mortgage contract but it is worth double-checking with your lender before you try to make a payment.
Insurance is an incredibly complex area of personal finance and different forms of cover are riddled with different hitches that make it crucial to read the small print. Failure to do so could lead you to pay for a product you would be never be able to claim upon, or unknowingly do something that invalidates your claim.
Always buy the right level of cover for your needs and pay close attention to any exclusions in the policy wording. For example, many travel insurance policies for winter sports won't pay out for treatment of injuries incurred while under the influence of alcohol.
Think a credit card can't do any damage at home in your drawer? Think again. Some credit and store cards charge a dormancy fee if you don't use them regularly.
For example, all Santander-issued store cards, including Topshop and Laura Ashley cards among others, charge a fee of £10 if you remain in debit for three consecutive months.
Exceed the monthly usage allowance in your broadband deal and you could be hit with a huge fee. Common with the cheapest broadband deals on the market, penalty charges for going over your contracted limit can push your bills up even higher than if you paid for a deal with unlimited usage.
According to Talk Talk, some households are being forced to pay an additional £40 per month for exceeding their usage allowance. BT for example, charges £5 per every 5GB extra used.
Familiarise yourself with the download limit in your package and the penalties for exceeding it, decide whether you are better off with an unlimited deal.
Packaged accounts: is your current account worth paying for?
In 1895 at the height of his success following the publication of The Picture of Dorian Gray and The Importance of Being Earnest, Wilde was charged with gross indecency and became embroiled in a libel trial to defend himself against accusations of homosexuality. He lost the battle and was forced into bankruptcy to cover legal costs for himself and the accuser, the Marquis of Queensberry – whose son Wilde was allegedly having an affair with. According to TrueTV.com, some of Oscar's most prized possessions, including first editions of his own books, were seized and sold at auction to pay the bill.
In a lesson that personal net worth means nothing against spiraling debts, the King of Pop filed for filed for bankruptcy in 2007 when he couldn't repay a $25 million loan on his home, Neverland Ranch.
Despite being recognised as the most successful entertainer of all time by the Guinness Book of World Records, Neverland became Jackson's downfall – reportedly costing more than $10 million dollars a year to maintain. According to Moneycrashers.com, even after signing a nearly $1 billion recording contract in 1991 and selling more than 750 million records, Jackson had just 0.05% of his net worth in accessible cash, which left bankruptcy the only option.
Actress Kim Basinger filed for bankruptcy in 1993 after she was sued for breach of contract for refusing to appear in film Boxing Helena, which later bombed. The actress lost a $8.1 million lawsuit to Main Line Pictures as a result and was forced to sell her $20 million investment in the town of Braselton, Georgia, USA.
When Mozart died at the early age of only 35 in 1791, he was poverty stricken and left vast amount of debt behind, which totaled over 4,000 florins (the equivalent of more than eight times the annual salary of a middle-class government employee, according to Noiseaddicts.com). Reports prevail that there was such little money in the house at the time of his death that Mozart was buried in a mass grave, the exact location of which is unknown to this day.
Everyone's favourite crooner filed for bankruptcy in 1976 after the royalties from his next album were promised to his ex-wife as a substitute for maintenance payments. The album was titled "Here, My Dear."
Despite creating one of the best-selling albums of all-time with Bat out of hell, Meat Loaf had to file for bankruptcy in 1983, after a series of bad business deals and legal issues. The rock star fell victim to unscrupulous managers, who he discovered were stealing his money – only for them then to sue him for breach of contract. Just when it looked like his luck was improving ahead of the release of his album Blind Before I Stop – the producer put a dance beat on every track, alienating his rock fanbase, making the album a failure and forcing him into bankruptcy for a second time.
Just when things couldn't get any worse for ex-Atomic Kitten Kerry Katona, she's been made bankrupt twice in five years.
The first was in 2008 after failing to deliver the final £82,000 of a £417,000 tax bill.
She was in the press for money issues again this earlier this year when a a TV advert for pay day loans fronted by Katona was banned for being irresponsible. Cash Lady offers loans of up to £300 a month with an annual percentage rate of 2,760%. "We've all had money troubles at some point, I know I have," says Katona in the TV ad. "You could see your bank and fill in loads of forms, but is there an easier way to get a loan ... it's dead fast too. Fast cash for fast lives."
However, Katona was dropped as the face of a payday lending company after filing for bankruptcy for a second time.
She filed for bankruptcy at Wigan County Court in July 2013, the Insolvency Service confirmed.
Disney's fist animation company Laugh-O-Gram Studio filed for bankruptcy in 1922 when its financial baker went broke. Disney was no longer able to pay his employees or his debts, and according to Totalbankruptcy.com, even struggled to buy a bus ticket to Hollywood. But he made it and there he made a fresh start with his new self-named production company that remains a worldwide success today.
Despite earning millions during his boxing career, former world heavyweight boxing champion Mike Tyson was forced to file for bankruptcy in 2003. He mounted about $27 million in bills, and is said to have squandered nearly $300m in ring earnings through lavish spending and bad advice, according to BBC News. The 37-year-old spent extravagantly on mansions, Bentley cars, jewellery, and even pet Bengal tigers while buying expensive gifts for his large entourage. Also in 2003, Tyson agreed to pay his ex-wife $6.5m from future earnings as part of a divorce settlement.
Drinking, gambling, fast cars and womanizing saw football wonder boy Best squander his cash and succumb to bankruptcy in 1982 with debts of £22,000. According to Bankruptuk.co.uk, at the time of his death in 2006, Best had an outstanding mortgage of £100,000 and owed London's Cromwell hospital £300,000 in treatment fees.